There are ominous clouds on the horizon. Europe is very slowly heading for some sort of disaster, China's economy is slowing, and the U.S. economic recovery seems to be ready to run off the track with the slightest push.
With this in mind I think it's time to look at ways to protect yourself against another significant downturn. If the market goes south, it's good to have some safety nets in place and even some ways to profit from the economic misfortune. There's no way to perfectly "recession-proof" your portfolio, but here are three strategies that will keep you sleeping soundly at night if the economy takes a turn.
Cash is king
A margin of safety should always be on the minds of investors, and there's no better margin of safety than cash on hand. Three companies that I included in a list I called a new breed of value stocks are some of the most well-known companies in the world and they have enough cash to buy a fairly good-sized country.
Apple (Nasdaq: AAPL), Cisco (Nasdaq: CSCO), and Microsoft (Nasdaq: MSFT) all have lots of cash, nice dividend yields, and strong positions in their respective businesses.
|
Company |
Market Cap |
Cash and Investments (net debt) |
Percent of Market Cap in Cash |
Dividend Yield |
|---|---|---|---|---|
| Apple | $533.7 billion | $110 billion | 20.6% | 1.9% |
| Cisco | $90.7 billion | $32 billion | 35.3% | 1.9% |
| Microsoft | $250.9 billion | $56.7 billion | 22.6% | 2.6% |
Source: Yahoo! Finance.
I'll admit, none of these companies got through the last recession and the financial crisis of 2008 without taking some damage to their share prices. But I still think that with a dividend yield of 1.9% or more and at least 20% of the market cap in cash, these stocks shouldn't fall too far if we head into another recession. Even if we don't, their values provide plenty of upside for investors.
Movies are a recession treat
When a recession hits, we cut back on a lot of things, but movies aren't necessarily one of them. In fact, domestic box office actually rose 10% in 2009 when we were in the depths of the recession, a trend we saw in the early-2000s recession as well. Betting on the box office has actually been better going into a recession than coming out of it.
Source: Box Office Mojo.
Two picks to take advantage of this trend are IMAX (NYSE: IMAX) and Disney. IMAX is growing its network of theaters worldwide and takes a disproportionate amount of revenue versus normal theaters. Disney has a track record of strong movie titles, and the Marvel and Pixar studios appear to be clicking on all cylinders. Combine the movie studios with couch-potato favorite ESPN and Disney has entertainment that's made for recession conditions.
If there are two movie companies that would come out smelling like a rose in the next recession, I think it's one with oversized screens and another with mouse ears.
Don't forget your shorts
Shorting stocks often scares investors, but it can be a great way to balance out your portfolio and profit from a decline in the stock market.
One stock that has perfection priced in is Amazon.com. I did a calculation last month that showed Amazon would have to grow sales more than 38% over the next five years and increase net margin to 4% to live up to its current stock price. If we go into a recession, that kind of growth will be out the window, and the stock will plunge.
Another stock that will suffer if the economy goes south is Caesars Entertainment (Nasdaq: CZR). This gaming company is already teetering on the brink of disaster, and a recession could push it over the edge. In the first quarter of 2012, the company reported $520.7 million in EBITDA -- a proxy for cash flow from a resort -- and had $562.0 million in interest expense from its $19.9 billion debt load. Las Vegas was hit hard by the recession three years ago, and any deviation from the company's current slow recovery could send it into even more dire straits.
What investors should watch for when looking for short picks is companies that are overvalued or that have large debt loads that will require refinancing or share offerings if earnings take a hit. A recession can bring these stocks back to reality and provide a way for you to profit if/when the market crashes.
Prepare for anything
I've begun preparing my portfolio for the worst by adding companies with large cash positions, high dividends, and extremely strong competitive positions. These stocks should limit my downside in the case of a recession while providing some upside if we avert disaster. Over the next few weeks, I will be adding short positions to provide some upside if the market goes down. What do you plan to do to recession-proof your portfolio?
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